Offset Dilution in Defence

Context: The recent dilution in “offset” policy in defence procurement acts as a setback for augmenting domestic capabilities.

Significant implications of an Offset Policy

• Secures commercial gains and global technological recognition: through negotiated bilateral deals.
• Increases “Path Dependency”: Buyer countries become depended on suppliers for spares and upgrades through advantages of bulk purchase
• Expands buying power:  Since the buyers often lack an industrial base, price and the terms of the contract often reflect the government’s relative bargaining strength and domestic political and economic considerations.
• Ensures up-gradation of domestic production by acquiring the technology.

• Indigenisation of production: Sourcing 30% of value of contract domestically in strict time frame.

• Promoting domestic Research and Development (R&D) by training Indian professionals in high-tech skills.

• Protects the proprietary knowledge and expertise: embedded in technology transfer deals. For, E.g. Soft credit restricts the use, modification and resale of such equipment and technologies.

• Cost Advantage: The higher (upfront) cost of agreement due to o?set clause would pay for itself by: 
• Reducing costs in the long term by indigenisation of production and 
• The potential technology spillovers for the domestic industry.

Issues with the Offset Policy:

• Comptroller and Auditor General’s (CAG’s) Report: 
• Only 8% of the investment made between 2007 and 2018 was actually realised.
• Technology transfer agreements in the offset contract were not implemented.
• Absence of an automatic monitoring system for offset contracts.

• Dilution of Offset Clause: 

• Setback for defence: as it will lower the prospects for boosting defence production since most defence deals are bilateral or a single supplier deal (given the monopoly over the technology). 

Case Study: Positive impact of Offset clause on the Aerospace industry

• Rise in Imports and exports: By 2014, exports increased to $6.7 billion from a paltry $62.5 million in 2005. – United Nations Comtrade Database.
• Enabled India to join the league of the world’s top 10 aerospace exporters by increasing exports via the offset policy.
• The 2005 policy helped promote a vibrant aerospace cluster, mostly Micro, Small and Medium enter prises (MSMEs) around Bengaluru.